Is INTERSHOP Communications (ETR:ISHA) A Risky Investment?

The external fund manager backed by Berkshire Hathaway's Charlie Munger, Li Lu, makes no bones about it when he says 'The biggest investment risk is not the volatility of prices, but whether you will suffer a permanent loss of capital.' It's only natural to consider a company's balance sheet when you examine how risky it is, since debt is often involved when a business collapses. As with many other companies INTERSHOP Communications Aktiengesellschaft (ETR:ISHA) makes use of debt. But the more important question is: how much risk is that debt creating?

When Is Debt Dangerous?

Generally speaking, debt only becomes a real problem when a company can't easily pay it off, either by raising capital or with its own cash flow. Ultimately, if the company can't fulfill its legal obligations to repay debt, shareholders could walk away with nothing. However, a more usual (but still expensive) situation is where a company must dilute shareholders at a cheap share price simply to get debt under control. Of course, plenty of companies use debt to fund growth, without any negative consequences. When we think about a company's use of debt, we first look at cash and debt together.

View our latest analysis for INTERSHOP Communications

What Is INTERSHOP Communications's Debt?

The image below, which you can click on for greater detail, shows that INTERSHOP Communications had debt of €3.48m at the end of September 2024, a reduction from €3.96m over a year. But on the other hand it also has €6.37m in cash, leading to a €2.89m net cash position.

A Look At INTERSHOP Communications' Liabilities

The latest balance sheet data shows that INTERSHOP Communications had liabilities of €15.4m due within a year, and liabilities of €8.84m falling due after that. Offsetting these obligations, it had cash of €6.37m as well as receivables valued at €7.46m due within 12 months. So its liabilities outweigh the sum of its cash and (near-term) receivables by €10.4m.

While this might seem like a lot, it is not so bad since INTERSHOP Communications has a market capitalization of €30.9m, and so it could probably strengthen its balance sheet by raising capital if it needed to. But it's clear that we should definitely closely examine whether it can manage its debt without dilution. While it does have liabilities worth noting, INTERSHOP Communications also has more cash than debt, so we're pretty confident it can manage its debt safely. There's no doubt that we learn most about debt from the balance sheet. But it is future earnings, more than anything, that will determine INTERSHOP Communications's ability to maintain a healthy balance sheet going forward. So if you're focused on the future you can check out this free report showing analyst profit forecasts.

In the last year INTERSHOP Communications wasn't profitable at an EBIT level, but managed to grow its revenue by 3.2%, to €39m. We usually like to see faster growth from unprofitable companies, but each to their own.

So How Risky Is INTERSHOP Communications?

While INTERSHOP Communications lost money on an earnings before interest and tax (EBIT) level, it actually generated positive free cash flow €171k. So taking that on face value, and considering the net cash situation, we don't think that the stock is too risky in the near term. Until we see some positive EBIT, we're a bit cautious of the stock, not least because of the rather modest revenue growth. When analysing debt levels, the balance sheet is the obvious place to start. However, not all investment risk resides within the balance sheet - far from it. Be aware that INTERSHOP Communications is showing 1 warning sign in our investment analysis , you should know about...

If, after all that, you're more interested in a fast growing company with a rock-solid balance sheet, then check out our list of net cash growth stocks without delay.

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This article by Simply Wall St is general in nature. We provide commentary based on historical data and analyst forecasts only using an unbiased methodology and our articles are not intended to be financial advice. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. We aim to bring you long-term focused analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material. Simply Wall St has no position in any stocks mentioned.